Defense Procurement Fraud: Improper Cost Allocation

Improper cost allocation is a more subtle form of a cross charging defense procurement fraud scheme. If a company has both government contracts and private commercial contracts (like most large aircraft companies), they are supposed to spread (or “allocate”) their costs fairly among the different jobs. With direct costs, such as the time a worker spends building an engine or other part for the aircraft, this is a simple matter: if the part will go into a plane for the government, the cost of building it is charged to the government job.

However, when costs are less directly tied to a particular project, such as supervisors’ time, the correct allocation is more complicated. There is a temptation to shift more costs to the government, which may pay on a cost-plus basis, and away from private customers, who simply pay the market price for the aircraft. Such cost shifting allows the companies to quote lower prices to their commercial customers (gaining a competitive advantage) without having to absorb the losses for such price cuts.

In a cost shifting scheme, the contractor will improperly record costs related to its commercial contracts onto the cost ledgers for its government contracts. By doing so, the contractor defrauds the government into paying for costs and overhead unrelated to its government contracts. This is a violation of the False Claims Act.

If you are aware of an instance where a defense contractor is committing or has committed improper cost allocation, cross charging or other fraud on the government and are thinking of blowing the whistle, please contact Michael S. Bigin.